2013 (9) TMI 564 - AT - Income Tax

Applicability of Transfer pricing provisions - transactions with joint venture - transaction with associated enterprises - international transaction - DTAA with Malaysia - Held that - all the decisions relating to the affairs of the Joint Venture are taken in India and the business is executed in India through a Joint Venture Agreement in India. Indisputably, Joint Ventures are residents in India. Even otherwise, Clause 3 of Article 4 of Malaysia provides that a person which includes AOPs also shall be deemed to be residents of the State in which its place of effective management is situated. On perusal of the Joint Venture agreements, it can be seen that all the decisions relating to the Joint Venture are taken in India and, therefore, the JVs are to be treated as residents only. The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more AEs in terms of section 92A(1) and 92A(2) of the Act. After considering the entire facts and circumstances of the present case and the findings of the DRP, we are of the opinion that the transactions taken place are with domestic enterprises and at least one among the AEs are not non-resident. Both the assessee and other parties which whom the assessee entered into transactions are the residents for the purpose of Indian Taxation. Any transaction between them will not constitute an international transaction. The transactions between the assessee and IJMII do not fall under section 92B(2) of the Act and same is the position in case of other entities with whom assessee carried on the impugned transactions - Provisions of transfer pricing not applicable - Decided against the revenue. Nature of expenses - whether for the purpose of business - genuineness - Deduction was not allowed on the reason that this payment is not verifiable and they doubted the genuineness of the payments. - Held that - The claim of payment of subcontract by the present assessee was not disqualified for deduction under the Act - Now, coming to next question as to whether the expenditure was capital expenditure or not, we are of the opinion that the expenditure was not a capital expenditure since the assessee did not acquire any capital asset. Whether the payment was in the nature of personal expenditure or not, again, in our opinion, this was not the payment relating to personal benefit of any employees or directors of assessee-company - Being so, it was not personal expenditure. Whether the expenditure was incurred wholly and exclusively for the purpose of business - In the case of Sassoon J. David & Co. Ltd. v. CIT 1979 (5) TMI 3 - SUPREME Court - the expression 'wholly and exclusively' used in s. 10(2)(xv) does not mean 'necessarily'. Ordinarily, it was for the assessee to decide whether any expenditure should be incurred in the course of his or its business - Such expenditure may be incurred voluntarily without any necessity and it was incurred for promoting the business and to earn profits, the assessee can claim deduction even though there was no compelling necessity to incur such expenditure - The fact somebody other than the assessee was also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv), if it satisfied otherwise the tests laid down by the law - The entire payment of subcontract cannot be disallowed as there was no evidence for such payment. Whether the assessee had established the payment of subcontract by producing the necessary evidence - Held that - Commissioner Of Income-Tax Versus Sigma Paints Limited 1990 (9) TMI 52 - BOMBAY High Court - The payment vouchers giving the relevant details, including the names of the payees, and also bearing the signatures of the payees as recipients, had been produced by the assessee-company before the Assessing Officer - The payment vouchers contained full details of the nature of transaction - In other words, the details of all transactions in respect of which the subcontract payment had been paid by the assessee-company were duly recorded in the payment vouchers and other evidence - The only missing link was the address of the payees, which it was all along submitted and, however, the letters written by the Assessing Officer to those parties were returned by the postal authorities and these things cannot jeopardise the claim of the assessee-company - The payments were correlated to the transactions which the assessee had with those persons - The only missing link was stated to be the names of the particular parties to whom the payments were made - This, the Tribunal held, could not be supplied without detriment to the business interests of that assessee, considering the very nature of things. The initial onus and burden of proof was on the assessee - In the instant case, such initial onus and burden of proof had been duly discharged by the Assessee Company by producing its audited books of accounts, payment vouchers-and other documents giving full details as to the nature of transactions, which necessitated the payment of such subcontract works and that this was an accepted norm and established in this line of business and that without such payment, it was not possible to survive in this line of business, as well as the prevalent trade practice in the line of business carried on by the Assessee Company all along. However, in this case the inflating of expenditure by the assessee cannot be ruled out. Considering the entire facts and circumstance of the case and chances of inflating the expenses by the assessee, to meet the ends of justice, we are inclined to disallow 15% of this payment. - Decided partly in favor of assessee.

Summary

Issues Involved:

1. Validity of adjustments made under Chapter X for transactions not classified as 'international transactions' under Section 92B.
2. Applicability of transfer pricing provisions to transactions with resident entities.
3. Legitimacy of additions made by the Transfer Pricing Officer (TPO) amounting to Rs. 104.95 crores.
4. Reimbursement of expenditure on a cost basis without profit elements.
5. Proportionate adjustment on Arm's Length Price (ALP) for Associated Enterprise (AE) sales.
6. Motive of tax evasion and the applicability of Chapter X provisions.
7. Confirmation of additions by the Dispute Resolution Panel (DRP) using extreme profit margin rate comparables.
8. Adjustments at the enterprise level using Transactional Net Margin Method (TNMM).
9. Additional disallowances related to sub-contractor payments, discrepancies in sub-contractor accounts, and travel expenses.
10. Levy of interest under sections 234B and 234D.

Issue-wise Detailed Analysis:

1. Validity of Adjustments under Chapter X:
The assessee argued that the TPO erred in making adjustments under Chapter X for transactions not classified as 'international transactions' as per Section 92B. The Tribunal found that the transactions between the assessee and its AEs, IJM Corporation Berhad, Malaysia, and joint ventures were not 'international transactions' since both parties were residents for tax purposes in India. Therefore, the adjustments made under Chapter X were deemed invalid.

2. Applicability of Transfer Pricing Provisions to Resident Entities:
The assessee contended that transfer pricing provisions do not apply to transactions with resident entities. The Tribunal upheld this view, stating that the transactions were between domestic entities and did not involve shifting profits outside India or tax base erosion. Consequently, transfer pricing regulations were not applicable.

3. Legitimacy of Additions by TPO:
The TPO made an addition of Rs. 104.95 crores by determining the ALP. The Tribunal found that the TPO erroneously exercised jurisdiction under Chapter X, as the transactions were not 'international transactions'. Thus, the addition was deemed invalid.

4. Reimbursement of Expenditure:
The assessee argued that reimbursements were purely on a cost basis without any profit element. The Tribunal agreed, noting that reimbursements do not require benchmarking as no margins are involved.

5. Proportionate Adjustment on ALP:
The assessee contended that the proportionate adjustment on ALP should be on AE sales. The Tribunal noted that after the TP adjustment, the total revenue recognized exceeded the contract value received by the AE, making such adjustments impermissible.

6. Motive of Tax Evasion:
The assessee argued that there was no motive of tax evasion, and the charging provisions relating to income under 'Profits & Gains of Business or Profession' do not include amounts computed under Chapter X. The Tribunal found no evidence of tax evasion motive and ruled in favor of the assessee.

7. Confirmation of Additions by DRP:
The DRP confirmed the TPO's additions using extreme profit margin rate comparables. The Tribunal found that the comparables selected by the TPO were functionally and economically different from the assessee's business. Therefore, the Tribunal excluded these comparables and recalculated the ALP, resulting in a lower profit margin within the tolerance limit.

8. Adjustments at Enterprise Level using TNMM:
The TPO made additions at the enterprise level using TNMM. The Tribunal found that the profit shown by the assessee was within the tolerance limit of +/-5%, making further adjustments unnecessary.

9. Additional Disallowances:
The Assessing Officer disallowed payments to sub-contractors amounting to Rs. 14.69 crores and travel expenses of Rs. 19.98 lakhs. The Tribunal partially upheld these disallowances, directing the Assessing Officer to disallow 15% of the subcontract payments and travel expenses due to lack of proper verification and supporting vouchers.

10. Levy of Interest under Sections 234B and 234D:
The Tribunal noted that the levy of interest under sections 234B and 234D is consequential and mandatory, directing the Assessing Officer to compute the interest accordingly.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal ruling in favor of the assessee on the applicability of transfer pricing provisions and making partial disallowances for subcontract payments and travel expenses. The Tribunal also directed the Assessing Officer to compute interest under sections 234B and 234D as per the revised order.